Is that the cold north wind blowing? Or is it just tariffs and midterm elections? The weather is awfully chilly here in Minnesota but what’s the market’s temperature? Is it cooling down or heating up?
Today I wanted to discuss two weather makers and discuss why they matter.
First, tariffs matter because they affect prices, both in end products and in components of the supply chains. And, rising prices generally are associated with inflation. If cars and appliances jump in price, won’t consumers need a raise? And of course, tight labor markets are already an inflation concern. The worry is that inflation will cause the Federal Reserve to raise rates faster and higher and that may create a recession.
Tariffs also cause business investment uncertainty. Where should companies produce and/or manufacture their goods? Is the current situation temporary or will it get worse? These questions obviously can be confounding to making large and long-term investment decisions. Even though it is a good economy; GDP was over 4% last quarter, unemployment is at a 50-year low, and consumer confidence is near a 20-year high, but delays in business investments-especially in plants and equipment – could stall growth. On a positive note, Canada recently signed onto a trilateral agreement with Mexico to retain NAFTA and the markets have responded positively. Remember the stated objective of tariffs is not to create a trade war but rather get a better deal for the United States and its workers. Since the European Union deal was reached and now NAFTA replaced, maybe we should be optimistic? We’ll see.
If tariff headwinds weren’t enough, we have the uncertainty of the outcome of midterm elections. Or maybe it’s certainty that’s causing uncertainty?! If you poll the pundits, they suggest the house will probably go Democratic. The senate is up in the air. They suggest an unpopular president may be to blame. It is true that it is rare to have presidential popularity this low when the economy is doing this well. It has also been suggested that women voters may turn on the GOP because the Presidential nominee for the Supreme Court was confirmed on a partisan vote. No matter the reason or reasons, it’s a problem. The worry is that a more divided government will stall or possibly reverse recent growth initiatives such as tax cuts. The thinking is that gridlock will prevail once again and if inflation and interest rates are rising then the economy will tank??! Oh my!
While I believe these fears are overblown and that the market will probably continue to climb the wall of worry, for now it doesn’t matter. Markets hate uncertainty. And it will probably continue to be held back until at least some of it has been resolved. I believe equity markets would be 10% higher without a trade war looming.
So, what are we doing at GMFG to navigate these uncertain markets? Stay diligent but stay focused. Growth and interest rates have been rising for the right reasons. Generally economic activity continues to be impressive. So, with rates rising, we will continue to add quality fixed income to help normalize portfolio allocations. That should allow us to reduce risk and increase yields while adding balance to portfolios. That’s a luxury we haven’t had for about 10 years.
We are also taking advantage of new tax saving opportunities – especially for business owners. And mitigating the impact of lost itemized deductions like state and real estate taxes and miscellaneous itemized expenses. Oh yeah and getting out our winter jackets. Because right now the only thing that’s certain is that the cold north wind will be blowing. But hey, we’re tough. We’ve been there before.
As always, we thank you for your trust and confidence. Should you have questions, please feel free to call.
Donald J. Phillips, CFP®
Greater Midwest Financial Group, LLC.
3222 Rice Street
St. Paul, MN 55126-3047
Phone: (651) 490-9790 Fax: (651) 490-9788